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Economic Perspectives – 23

Just a few pointers previously raised that bear some emphasis, even repetition:

(1) The UK Government is writhing in the furnace of its own afflictions by persisting with the notion of “negotiations” in the Brexit context. This obsession is, of course, utterly misplaced because free trade does not require trade deals between governments, any more than trade between companies in Manchester and companies in Southampton depends on a deal between the Manchester City Council and the Southampton City Council.

If, heaven forbid, Councillors in those cities somehow became embroiled in discussions over trading terms between those cities, any resulting terms would serve only to create barriers to trade where previously none existed. The essential mantra for government on the subject of trade is simple: “just stay out of the way!” Even where governments have been seemingly successful in facilitating bilateral free trade arrangements, as for example between the EU and South Korea, they have achieved no more than the companies directly involved would have accomplished anyway, without official ‘help’.

Unilateral free trade, rightly understood, is non-negotiable!

(2) Superficially, it sounds crazy: eliminate all tariffs on imports regardless of any tariffs imposed by foreign governments on their imports from the UK. The principal gain for UK consumers lies in having cheap imports. Right now, the aim of the EU’s Common Agricultural Policy is to protect European dairy farmers from more efficient foreign competition by imposing a tariff of £1.60 on a kilo of butter imported from, say, Australia. This means that UK consumers [remember that the UK is still an EU member!] now have to pay more for butter than they otherwise would. Ergo, they have correspondingly less to spend elsewhere, including products of UK firms.

It’s a win-win situation because unilateral free trade has no downsides

(3) This principle is unaffected if the imports in question are subsidised by the governments of the exporting firms (as would be the case if the price of Australian butter is cheaper only because butter exports are subsidised by the Australian government). Again, UK consumers benefit when importing goods made cheaper by foreign subsidy. It’s a win-win situation because unilateral free trade has no downsides: both tariffs and subsidies harm only the citizens of the countries that impose them.

Inevitably situations arise when free trade, though beneficial for the whole community, highlights the need for a reallocation of productive resources within the economic framework of a free-trading nation. This arises when jobs in a particular sector are at risk from lower-priced imports. The answer is not, however, for government to allow retaliatory expediency to supervene over economic principles. Such resource reallocation is a natural, necessary result of eliminating artificial pricing policies.

(4) It follows from the above that gains enjoyed by UK citizens, flowing from free trade policies, are independent of the EU’s (or any country’s) own trade practices. If the effect of EU trade regulations is to burden their own populations by taxing imports from Britain, we shall still be better off – provided that the UK government refrains from retaliating by similarly burdening its own citizens.

(5) Final emphasis: unilateral free trade works. It is effective. It has been successfully applied in Singapore, Hong Kong and New Zealand. Their trade policies seek only to improve access to foreign markets for their exporters, principally in the fields of electronics, financial services and farming. But regardless of what the governments of other countries choose to enact, these free-trading nations do not impose import barriers themselves. As an aside, it is interesting that we in the UK have never had a trade agreement with our largest trading partner by far – the USA.